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Court of Appeals Upholds Employer-Employee Non-Compete Agreement

July 3, 2009

The Court of Appeals of Wisconsin in Techworks, LLC v. Wille recently reviewed the validity of certain provisions in an agreement not to compete between a business and its former employee. [1] The Court of Appeals also addressed whether provisions related to non-disclosure of confidential information were so intertwined with the non-compete language to invalidate the non-compete provisions.

In Techworks the employer sought to enforce a non-compete agreement against a former employee who had gone to work for a competitor. The employee argued that the non-compete agreement was invalid because it contained unreasonable and overbroad non-compete and non-disclosure provisions.

The Non-Compete Provision
The validity of a non-compete agreement under Wisconsin law is determined by application of Wis. Stat. Â§ 103.365. The Techworks Court thus reviewed whether the non-compete language was unenforceable under Wisconsin law based on the following factors as called for by Wis. Stat. Â§ 103.465 and Wisconsin cases interpreting that statute:

(1) be necessary for the protection of the employer or principal; (2) provide a reasonable time restriction; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive to the employee; and (5) not be contrary to public policy. [2]

The provisions under review provided that for a period of two years after the end of an employee’s employment, the employee is prohibited from competing with the employer:

by providing competitive services to any customer who had been a customer of the employer during the two years prior to the employee’s departure if the customer was located within 100 hundred miles of one of the employer’s existing office locations; and

by providing competitive services to any customer who had been a customer of the employer and who had been served by the employee during the two years prior to the employee’s departure Irrespective of the customer’s location.

The non-compete agreement was used by the employer to prevent its information technology consultants from raiding its clients in the event such consultants left the firm. The employer in Techworks provided services which allowed its business clients to outsource their information technology departments. The employer provided consultants to its clients who in turn provided information technology services at the clients’ work sites.

The Court upheld the non-compete provisions through an analysis of the five factors recited above. This article addresses only a portion of the Court’s analysis as the necessity of the non-compete agreement, whether it was oppressive to the employee, and whether it violated public policy were not discussed in detail in the case.

The Court noted that Wisconsin courts had previously held that a two year term for a non-compete provision had been deemed reasonable by Wisconsin courts and is not per se invalid. The Court also found the two year backward looking basis for determining the identity of restricted customers to be reasonable because it did not extend to the date the employee’s employment commenced. The Techworks Court observed that covenants not to compete with a look back period, for determining the identity of restricted customers, dating to the commencement of the employment relationship had been deemed unreasonable by the Wisconsin Court of Appeals. [3] As the dissent indicates, the two year look back period basis means that a former employee with no connection to a hypothetical customer who fired Techworks a year and a half before the employee departed would be prohibited from serving that customer.

With respect to both the reasonableness of the restricted time period and the restricted territory the Court quoted with approval the following language from Rollins Burdick Hunter of Wisconsin, Inc. v. Hamilton, 101 Wis.2d 460, 462, 304 N.W.2d 752, 757 (Wis. 1981):

The limitation expressed in terms of particular clients or customers more closely approximates the area of the employer’s vulnerability to unfair competition by a former employee and does not deprive the employee of legitimate competitive opportunities to which he is entitled.

This principal of law bears most directly on geography restrictions. Its use by the Court with respect to duration provisions suggests that courts may provide employers more room with respect to time period and territory restrictions, provided the employer identifies actual clients and customers, or a reasonable basis to identify clients and customers who are off limits to the former employee. This, along with the reasonableness (at least under the Techworks facts) of a two year backward and forward looking restriction, should be taken into account when drafting non-compete agreements in Wisconsin.

Indivisibility of Restrictive Covenants
The Techworks court also examined whether certain confidentiality covenants contained in the contract were indivisible from the non-compete provisions. The issue was whether these confidentiality provisions (assuming their invalidity) were so intertwined with the non-compete provisions such that the non-compete provisions must also be deemed invalid.

The court identified the relevant principal of law with respect to indivisibility as those stated in Mutual Service Cas. Ins. Co. v. Brass [4] and Streiff v. American Family Mut. Ins. Co. [5] where the courts held as follows respectively:

Any part of an indivisible covenant, even if reasonable on its own, will not be given effect if any other part is unreasonable.

Brass, Â¶ 10.
At least where the restraint is indivisible, it is clear that our legislature has balanced the employer’s business needs and the employee’s interest in personal liberty and has, by the adoption of sec. 103.465, opted not to give effect even to so much of the covenant as would be a reasonable restraint. The legislature has in sec. 103.465 instructed the court as to the equities between the parties. Under sec. 103.465 if an indivisible covenant imposes an unreasonable restraint, the covenant is illegal, void, and unenforceable even as to so much of the covenant as would be a reasonable restraint. We abide by this determination in this case and hold the entire covenant void and unenforceable.
Streiff, at 512. [6]
The Techworks Court determined that the confidentiality provisions, assuming their invalidity under Â§ 103.465 for purposes of this analysis, were not indivisible from the non-compete provisions because they were contained in a separate section of the agreement. That section of the agreement dealt with prohibitions on the solicitation of employees of the former employer, the solicitation of business from customers of the former employer and the disclosure of certain information. These prohibitions were separate from the competition prohibitions which were located in a separate section.

Given that non-compete agreements in the employer-employee context will be closely scrutinized, their provisions should be carefully drafted to be separate from one another. If one provision is deemed illegal, other key provisions will be considered indivisible and consequently invalid.

Indivisibility became an issue in Techworks because Wisconsin courts have expanded the reach of Wis. Stat. Â§ 103.465 beyond non-compete provisions to include non-disclosure or confidentiality provisions. This prohibits the disclosure of competitive information such as customer lists or similar information. [7] Thus the argument was available that an improper non-disclosure provision that was indivisible from express non-compete provisions rendered the non-compete provisions invalid as well. [8]

For more information about "Court of Appeals Upholds Employer-Employee Non-Compete Agreement," contact Edward J. Lawton at elawton@axley.com or 262.409.2278.

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